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Unobserved preferences and dynamic platform pricing under positive network externality

Author

Listed:
  • Hannu Huuki

    (University of Oulu
    University of Oulu)

  • Rauli Svento

    (University of Oulu)

Abstract

We study the dynamic optimization of platform pricing in industries with positive direct network externalities. The utility of the network for the consumer is modeled as a function of three components. Platform price and participation rate affect the consumer’s decision to join the platform. The platform operator is assumed to know the consumer’s sensitivities with respect to these components. In addition, the consumer’s utility is a function of other attributes, such as network privacy policies and environmental effects of the service. We assume that the distribution of these unobserved preferences in the potential customer base is known to the platform operator. We show analytically how the unobserved preferences affect the dynamic platform price design. Both static and rational expectations with respect to the platform participation are presented. We simulate an electricity market demand side management service application and show that the platform operator sets low prices in the launch phase. The platform operator can set higher launching prices if it can affect customers’ preferences, expectations or adjustment friction.

Suggested Citation

  • Hannu Huuki & Rauli Svento, 2020. "Unobserved preferences and dynamic platform pricing under positive network externality," Netnomics, Springer, vol. 21(1), pages 37-58, December.
    • Handle: RePEc:kap:netnom:v:21:y:2020:i:1:d:10.1007_s11066-020-09140-w
    DOI: 10.1007/s11066-020-09140-w
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    More about this item

    Keywords

    Dynamic pricing; Network externality; Unobserved preferences; Electricity market; Demand side management;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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